SerpApi.Org
Stocks are rebounding from last week’s tech-driven sell-off, but investors should heed a warning from the bond market that stocks remain overpriced.
Yields on long-term government Treasuries have risen while the profits generated by S&P 500 companies relative to their prices haven’t kept pace. The result is the so-called equity risk premium—the extra return investors expect for holding risky stocks over safe bonds—is getting compressed.
For most of 2026, the premium has been negative. When comparing the latest 4.95% earnings yield of the S&P 500 with the 5.0685% yield on the 30-year Treasury, the value of -0.1185 percentage points on Friday is higher than only 6.4% of the trading days since July 2007.
When compared with the 10-year Treasury’s yield, stocks offered a positive but meager equity risk premium of 0.2654 percentage points last week. Less than 5% of days since July 2007 have had a worst equity premium.
The equity-risk premium dipped to their lowest levels for the year in mid-May when long-term bond yields surged but the S&P 500 earnings yield declined.
Why the disappearing equity risk premium? Pricey stocks, of course, are part of the equation. But the other factor is soaring real yields, or after-inflation yields, for bonds. At 2.91% on Thursday, the real yield on a bond expiring in 30 years was the highest since 2008. On the 10-year bond, real yield levels rose to 2.35% on Thursday, the highest since late 2023.
Even the “2-year real yields have surged to their highest level since mid-2024 at breakneck speed,” wrote Capital Economics Senior Market Economist James Reilly. The rise over the past couple of months or so is amongst the largest in decades, he added.
Higher real yields partly reflect the nation’s growing debt and the need for the U.S. Treasury Department to sell more bonds in the future to finance it. Yet another factor: fears that the Federal Reserve hasn’t completely snuffed out high inflation and may have to raise rates later this year or next year to get prices under control.
When comparing the real yield on a 30-year Treasury with the 4.3% S&P 500 earnings yield—derived from unadjusted profits—today’s equity risk premium looks even smaller, according to Rosenberg Research’s David Rosenberg. “Its a razor-thin ERP on this basis by historical standards,” he wrote last week on Tuesday.
It is already hard to justify buying stocks, as the S&P 500 hits one record after another this year. Rising real yields make it even harder to justify.
Write to Karishma Vanjani at [email protected].
